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Executive Summary:

  • Valuations remain high despite the recent pullback. Meanwhile interest rates are below fair value based on current economic conditions. Rate normalization could put additional pressure on valuations.
  • US GDP is growing beyond its 2.5%-3% potential, thanks to easy monetary policy and a fiscal tax boost. We expect growth to revert to potential next year.
  • Credit conditions broke down last month as lenders tightened their purse strings. Spread widening has proved to be a good early-warning signal for risk takers. Our credit conditions model has shifted to cash.
  • Investors fret that the global economy is slowing. Recent data confirm that view; however, we do not see a recession threat on the horizon, as production growth remains positive in Europe and Japan. China’s export growth continues to be robust in the face of tariffs, although construction growth there is trending lower.
  • Technical signals point lower as momentum has broken down in most equity markets and breadth is low. More than two-thirds of domestic equities are trading below their 200-day moving averages.

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